Estimating Present Value of Future Earnings: Experience with Dedicated Portfolios

Abstract

The determination of pecuniary damages in personal injury and death actions often requires estimates that encompass expected future experience over extended periods of time. An anomoly plays an integral role in the estimation process. Namely, although neither the actual levels of future interest rates nor future wage growth rates can be predicted with reasonable certainty, the present value of magnitudes emerging from them can be. Such certainty emerges by virtue of the predictable covariance between the rates of growth of workers' earnings and interest rates reflecting the time value of money. This paper provides empirical evidence relating to the appropriate differential between interest rates and the rate of growth in wages for estimating the present value of a future earnings stream.